Efficiency of Mandatory and Discretionary Spending

Which budgetary institutions result in efficient provision of public goods? We analyze a model with two parties deciding the allocation to a public good each period. Parties place different values on the public good, but these values may change over time. We model a budgetary institution as the rules governing feasible allocations to mandatory and discretionary spending programs. We model mandatory spending as an endogenous status quo since it is enacted by law and remains in effect until changed, and discretionary spending as periodic appropriations that are not allocated if no new agreement is reached. We consider budgetary institutions that either allow only discretionary programs, only mandatory programs or an endogenous choice of mandatory and discretionary programs. We show that discretionary only institutions can lead to dynamic inefficiencies, mandatory only institutions can lead to static and dynamic inefficiencies, whereas allowing an endogenous choice between mandatory and discretionary programs will result in public good allocations that are statically and dy- namically Pareto efficient if the value of the public good is increasing over time. Furthermore, we show that if mandatory programs are allowed to be temporarily suspended, an endogenous choice of mandatory and discretionary programs will result in public good allocations that are dynamically and statically Pareto efficient, for any change in the value of the public good.